*This article may not reflect current changes being made by FHA which are in the process of being finalized by FHA at this time. Contact us to confirm current requirements.
An FHA loan allows a buyer to purchase a condominium with a smaller down payment, and in some instances, at lower interest rates. A purchaser can put as little as 3.5% down as opposed to the 20% that is required for conventional loans. Until February 2010, FHA provided spot approvals, i.e. approvals for individual units. After February 2010, FHA required the entire condominium project to be certified in order for a purchaser to obtain an FHA loan. While there are numerous requirements that a condominium association must meet in order to receive FHA Certification, and the requirements are always subject to change, the three (3) most common roadblocks to obtaining FHA Certification are currently as follows:
1. Your Association has too many delinquencies.
In order to be eligible to obtain FHA certification, a condominium project cannot have more than fifteen percent (15%) of its total units in arrears more than sixty (60) days. The arrearage does not include late fees or other administrative expenses. However, the fifteen percent (15%) includes all units (occupied, investor, bank owned and vacant). Accordingly, a condominium association looking for FHA certification should adopt a collection policy as part of its rules and make sure that it is enforced to keep the delinquency rate down.
2. Your Association has too many renters.
For all existing or non-gut rehabilitation projects, any investor/entity (single or multiple owner entities) may own up to fifty percent (50%) of the total units at the time of project approval if at least fifty percent (50%) of the total units in the project have been conveyed or are under a bona fide contract for purchase to owner-occupant principal residence purchasers. If more than half of the units are owned by investors and are not “owner occupied”, the Condominium will not be eligible for FHA certification. Accordingly, a condominium association should amend its Bylaws to impose rental caps in order to ensure that no more than fifty percent (50%) of the units are rented.
3. Your Association’s financials are not in order.
FHA Certification will require a review of your Association’s financial documents and budget in order to ensure that the following requirements are met:
A. Sufficient funds are available to maintain and preserve all amenities and features unique to the Condominium Project; and
B. A replacement reserve fund is maintained for capital expenditures and deferred maintenance in an account representing at least 10 percent of the budget is maintained; and
C. The Association maintains adequate funds for insurance coverage and deductibles.
Preparing financial statements and maintaining an adequate reserve fund are not only necessary for FHA certification, but they are also required by the Michigan Condominium Act. Specifically, MCL 559.157 requires Associations that have annual revenues greater than $20,000.00 to have audited financial statements prepared by a CPA on an annual basis, unless the Co-Owners vote to opt out of this requirement. MCL 559.205 and Administrative Rule 559.511 require a condominium association to maintain a reserve fund for major repairs and replacement of the common elements. The reserve fund shall, at a minimum, be equal to ten percent (10%) of the Association’s annual budget on a noncumulative basis. Accordingly, an association needs to ensure that its financial house is in order prior to seeking FHA certification.
Contact us today at 248.644.4433 to discuss how we can assist in pursuing FHA certification for your condominium association.